Hoa Sen Group

8/10/2019 Hoa Sen Group

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debt/equity ratio above the median of localsteel companies.

Please see important disclosure information at the end of thisreport.


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CONTENTSINDUSTRY OVERVIEW ......................................................................................................................................................................3HOA SEN GROUP (HSG) ....................................................................................................................................................................5

HISTORY ...................................................................................................................................................................................5

ORGANIZATIONAL STRUCTURE AND MANAGEMENT .........................................................................................................6

SHAREHOLDERS AND OWNERSHIP .....................................................................................................................................8

COMPANY OVERVIEW .......................................................................................................................................................................9

A LEADING STEEL SHEET AND STEEL PIPE PRODUCER ...................................................................................................9

CAPACITY EXPANSION TO DRIVE GROWTH......................................................................................................................11

NATIONWIDE RETAIL NETWORK TO DELIVER PRODUCTS TO END USERS .................................................................13

SALES GROWTH TO BE FURTHER DRIVEN BY EXPORTS ...............................................................................................14

FINANCIAL PERFORMANCE ...........................................................................................................................................................15

COST ANALYSIS ....................................................................................................................................................................15

GROWTH.................................................................................................................................................................................16

EFFICIENCY AND PROFITABILITY .......................................................................................................................................18

LIQUIDITY AND SOLVENCY ..................................................................................................................................................20

FORECAST ASSUMPTIONS ............................................................................................................................................................21VALUATION ...................................................................................................................................................................................... 24

DISCOUNTED CASH FLOW ...................................................................................................................................................24

COMPARABLE MULTIPLES ...................................................................................................................................................25

SENSITIVITY ANALYSIS ...................................................................................................................................................................26TECHNICAL ANALYSIS ....................................................................................................................................................................27CONCLUSION................................................................................................................................................................................... 28


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INDUSTRY OVERVIEWDuring the period from 2008 to 2013, the sales volumes of Vietnam Steel Association (VSA)'smembers achieved the compounded annual growth rates (CAGRs) of 18.9% in steel sheet and15.3% in steel pipe, higher than a CAGR of 7.8% in construction steel.

The first 8 months of 2014 (8M2014) saw consumption volume of steel sheet increase by 29%y-o-y thanks to exports while consumption of steel pipe grew by 32% y-o-y mainly due todomestic growth.

Steel sheetSteel sheet is gradually replacing asbestos-cement for roofing and wall covering due to majorhealth concerns. Steel sheet is a type of flat steel product, produced from raw material which iscold rolled coil. Steel sheet is diverse in terms of color, size, and thickness and has manyapplications, but it is used mostly in roofing, construction, manufacturing mechanical productssuch as automotive.

It's worth noting that the gap between supply and demand of this segment further widened as

new companies entered the market or when existing companies increased capacity. Steel sheetproduced by Vietnamese firms is of medium-grade, which is used mostly in roofing and generalusage such as home furniture and parts for motorcycle repair. Other flat products such asheavy plates used for shipbuilding and galvanized sheets used for cars have to be imported.

The main growth driver of sales volume of this segment has been through export activities.Countries like Myanmar, Indonesia and Malaysia have significant demand for steel sheets ofmedium-quality for general usage and civil construction; these are products Vietnam can supplyat attractive prices. Vietnam's steel sheet producers, benefiting from relatively lower labor cost,have a competitive edge in terms of product pricing. In 8M2014, total sales volume of VSAmembers reached 1.18 million tons, up 29.1% y-o-y, in which export volumes surged by 51.9%y-o-y to reach 520 thousand tons, accounting for 44% of total sales volumes. In contrast,domestic sales volumes reached 663 thousand tons, increased by 15.6% y-o-y.

The main client group of steel sheets is individual contractors, especially in suburban areas,which are less vulnerable to changes in prices than contracts for big

Galvanized steel sheet (thousand tons) Steel pipe (thousand tons) Consumption Production Consumption Production

2008 2009 2010 2011 2012 2013 8M2014 2008 2009 2010 2011 2012 2013 8M2014Source: Vietnam Steel Association Source: Vietnam Steel Association


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construction sites. Moreover, their bargaining power is low. However, as steel products are becoming morestandardized, individual customers have the power of switching to another brand without much switching cost.The market, therefore, is a highly competitive one as there are several FDI firms (Blue Scope Steel, Sun Steel,and most recently China Steel Sumikin) operating in this segment. These firms have a certain advantage interms of economy of scales and advanced technology. Despite these, the steel sheet segment still holdspotential for domestic companies that can offer high-quality products with reasonable prices and especially havegood relationships with local contractors.

Steel pipesThe steel pipe segment witnessed the participation of many companies specializing in the steel sheet segmentbut wanting to diversify their product offerings, as in the case of Hoa Sen Group which entered the steel pipesegment in 2009 and Nam Kim Group which entered in 2012. These companies are more capable with rawmaterial sourcing and possess advanced technology, which poses a competitive challenge for companies thatonly manufacture steel pipe.

Steel pipe plays an important role in engineering construction and industrial production. As the size of the steel

pipe segment is particularly small compared to the steel sheet segment, the gap between supply and demand isnot prominent, this segment can absorb the extra production volume even when existing firms expand capacitiesor new firms enter the market.

In 8M2014, sales volumes of VSA members reached 681 thousand tons, up 32% y-o-y. Specifically, exportvolumes reached 103 thousand tons, down 20% y-o-y; in contrast, domestic sales volumes increased sharply by49% to reach 577 thousand tons, accounting for 85% of total sales volume. Part of the reason for the declininggrowth rate in export volumes is rising anti-dumping lawsuits in export markets (the United States and Canada).However, we do not believe this is a major concern for steel pipe producers as their export volumes only accountfor a small portion of their total sales volumes (3.2%). Moreover, steel pipe producers' target export markets aremostly within the South East Asia region due to Vietnam's geographic location.

Material price trendGlobal HRC prices fluctuated significantly during 2014 but generally trended downward. In 1Q2014, in China, thedecline in iron ore prices dragged down HRC price despite the slight improvement in demand and inventory

reduction, in particular, HRC price declined from USD530-540/ton FOB in January to USD520/ton FOB in March.In the beginning of 2Q2014, HRC price increased in the first two weeks of the quarter to reach USD525-530/tonFOB. However, from the end of April, slowing domestic prices and tightening monetary policy coupled with weakdemand, declining ore prices still put the market in a downward trend as buyers are not willing to pay higherprices. Export prices fell continuously during the quarter and adjusted to reach USD505-515/ton FOB by the endof 2Q2014. By the beginning of August, HRC prices remained stable but adjusted downward slightly by the endof the month to reach USD500 to 508 per ton FOB.


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2001

HOA SEN GROUP (HSG)HISTORYFormerly a steel sheet retail outlet, Hoa Sen JSC - the precursor of Hoa Sen Group, was founded in 2001 withan initial chartered capital of VND30 billion, 22 employees, and three retail branches.

The Group currently specializes in producing steel sheets - steel pipes and other construction materials toserve industrial production and civil construction.

The Group's main strategy focuses on:

(1) Advanced technology and integrated manufacturing processes to produce high quality products atcompetitive prices.

(2) Expanding its nationwide distribution network to sell products to end-users.

(3) Building a friendly and community-oriented brand.

Development timeline

Hoa Sen JSC, the precursor of Hoa Sen Group, was established with an initial chartercapital of VND 30 billion

Source: HSG

Established Hoa Sen Steel Sheet JSC

Established Hoa Sen Building Materials JSC and Hoa Sen Engineering -Construction JSC. Hoa Sen JSC was renamed as Hoa Sen Group Signed an agreement with Gemadept JSC to establish Hoa Sen -Gemadept International Port & Logistics JSC Listed 57,038,500 shares on Ho Chi Minh City Stock Exchange.

Started construction of Phase 1 of Hoa Sen Phu My Steel Sheet Plant

2006

2007

2008

FY2009

FY2010 Increased chartered capital from VND570billion to VND1,008billion

Inaugurated Phase 1 of Hoa Sen Phu My Steel Sheet Plant. Export sales achieved USD 101 million

The export sales achieved USD 180 million. Inaugurated the first franchise agency at Dak Nong.

Export sales achieved USD 252 million Implementing Phase 2 of Hoa Sen Phu My Steel Sheet Plant

FY2011

FY2012

FY2013

FY2014 Inaugurated Phase 2 of Hoa Sen Phu My Steel Sheet Plant


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Chartered capital (VNDbn) 1.008 1.008 1.008 1.008 1.008

Source: HSG

ORGANIZATIONAL STRUCTURE AND MANAGEMENT

Source: HSG

GENERAL ASSEMBLY OFSHAREHOLDERS

> < -------------f

BOARD OF DIRECTORS

> 1

BOARD OF MANAGEMENT

> *

BOARD OFSUPERVISIORY

LEGISLATION & ADMINISTRATIVE

DIVISION

FUNCTIONALDIVISIONS

SUBSIDIARIES & ASSOCIATEDCOMPANIES

HOASEN PHUMYSTEELSHEETPLANTBRANCH

HOASENTRANSPORTATION &ENGINEERING ONE

MEMBER LTD

HOA SENBUILDING

MATERIALSONE

MEMBER LTD

HOA SEN NGHE ANSTEEL SHEET ONE

MEMBER LTD

HOA SEN BINH DINHSTEEL PIPE ONE

MEMBER LTD

HOA SENGEMADEPT

LOGISTICS &INTERNATIONAL

PORT JSC

HOA SEN STEELSHEET ONE MEMBER

LTD

RETAILNETWORK


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The Group owns a retail network consisting of 133 branches and six base depots and manages

the Hoa Sen Phu My Steel Sheet Plant.The Group has five subsidiaries in which it holds 100% ownership:

Hoa Sen Steel Sheet One Member Limited Liabilities Company Hoa Sen Building Material One Member Limited Liabilities Company Hoa Sen Transportation & Engineering One Member Limited Liabilities Company Hoa Sen Nghe An Steel Sheet One Member Limited Liabilities Company Hoa Sen Binh Dinh Steel pipe One Member Limited Liabilities Company

Divestment from non-core |n 2008, the Group partnered with Gemadept Corporation to build Hoa Sen project to focus on construction Gemadept Logistics & International Port in the Cai Mep - Thi Vai port, in which thematerial business.

Group contributed 45% capital and Gemadept contributed 51%. The revised total investmentcapital was reduced to USD30 million instead of USD63 million per initial plan. By the end ofFY2013, the access road leading to the port and the port's design had been completed. TheGroup thus far has disbursed VND44.45 billion and is now seeking partners to transfer itsholding as the Group decided to focus on its core business.

The Group's management team is well-experienced and has worked for the Group for manyyears. Mr. Le Phuoc Vu, Chairman, has contributed significantly to the leadership and strategicdevelopment of the Group. In the early days, when HSG first started out as a steel sheetretailer, it faced challenges from many competitors who were more financially capable.

Accordingly, Mr. Vu decided to set his own strategic development for the Group. As someonewho has ample understanding of the domestic market, he realized that the development of aretail network to distribute products directly to end-users without going through middle channelsplays a key role in the success of the Group and that the undertaking was necessary in spite ofthe significant investment of time and capital required.

I Name I I Title I Experience/Degree 1 OwnershipBoar o Directors Mr. Le Phuoc Vu Chairman 12 years building and developing the Group 16.47%

r. ran goc u ce a rman years o exper ence n nance, account ng, taxat on, governance . Mr. Pham Gia Tuan Member 10 years of experience in taxation, accounting 0.00%

r. ean- r c acquem n em er years o experence n restructurng ea ng corporat on n , urope . Mr. Tran Quoc Tri Member Bachelor of Accounting and Auditing 0.00%

oar o anagemen Mr. Tran Ngoc Chu General Director 25 years of experience in finance, accounting, taxation, governance 0.09% Mr. Hoang Duc Huy Deputy General Director 25 years of experience in organization control 0.01% Mr. Tran Quoc Tri Deputy General Director Bachelor of Accounting and Auditing 0.00% Mr. Vu Van Thanh Deputy General Director Master of Development Economics 0.02% Mr. Nguyen Minh Khoa Deputy General Director Master of Business Administration 0.01% Mr. Nguyen Van Quy Deputy General Director Bachelor of Business Administration and Electricity 0.00% Mr. Ho Thanh Hieu Deputy General Director Bachelor of Accounting and Auditing 0.00% Supervisory Boar I Mr. Le Vu Nam Head of Supervisory Board Doctorate in Economics Law 0.01% Mr. Ly Van Xuan Member Associated Professor and Doctor of Medicine 0.09% Mr. Le Dinh Hanh Member Bachelor of Finance-Currency-Credit 0.00%

Source: HSG


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Tam Thien Tam One MemberLtd 5.9%

Deutsche AGLondon 7,0%

Source: Company data

Ownership structure as of August 22, 2014

Others 30,8%

Tam Hy OneMember Ltd

22.8%

Mr. Le Phuoc Vu, Chairman,

controls nearly 40% of the voting

shares of HSG.

SHAREHOLDERS AND OWNERSHIP

^_Red River Holdings 17,1%

ne Bank

)nd 0n Mr.Le Phuoc Vu16.5%

Since its inception, HSG's shareholder structure has been

concentrated as the percentage of ownershipof the Board of Directors (mainly Mr. Le PhuocVu) fluctuated between 38% and 44%. However, this structure sawmajor change in 2014 when Mr. Le Phuoc Vu sold 24 millionshares in March 2014 and another 3 million shares in July2014 through agreement transactions. After the transaction, Mr. Vu owns 16.5% of the Group'sshares, down from 44.5%, and becomes the third largest shareholder. Meanwhile, Tam Hy OneMember Ltd., a newly established company where Mr. Vu is Chairman and Managing Director,successfully bought 21 million shares in April and one million shares in August 2014 and iscurrently the largest shareholder. Mr. Vu, therefore, effectively controls nearly 40% of the votingshares.

The Group's shares have received much attention from many domestic and foreign institutionalinvestors. In the past, the shareholder structure included the participation of foreign funds suchas STIC Investments from South Korea and SSF Capital from Malaysia. These funds have

contributed significantly in strategic cooperation with HSG since 2010, which was a difficult yearfor steel producers. In 2010, the Group successfully issued 11.96 million shares for the threefinancial institutions (including STIC Investments) and gained VND538 billion, which providedfunding to expand production capacity and develop new products including hot dippedgalvanized steel with NOF technology.

As of July 2014, major foreign shareholders (holdings more than 1%) own 32% of the Group'sshares. One of the most prominent shareholders is Red River Holding (RRH), well-known fortheir active and influential approach to investing and has made positive contributions to theperformance of the Group. At the Annual General Meeting of FY2013, Mr. Jean-EricJacquemin, Chairman of the Board of Directors of Red River Holding, was elected as a memberof the Board of Directors and is responsible for the Investor Relations Sub-board and FinanceSub-Board, further contributing to the strategic development of the Group.

Tam Hy One Member Ltd 22,000,000 22.84% e ver o ngs , , .

Mr. Le Phuoc Vu 15,867,152 16.47% Deutsche Bank AG London 6,691,923 6.95% Tam Thien Tam One Member Ltd 5,650,000 5.87% Deutsche Bank Aktiengesellschaf 4,822,123 5.01% Epsom Limited 2,920,600 3.03%

Major shareholders(>1%)

Numberofshares

Ownership

Source: Company data


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HSG's galvanized steel pipe is

highly regarded by the market. The

Group gained 8M2014 market share

of 19.8% in steel pipe.

This product was launched in 2009 and contributed from 7% to 13% of net revenues fromFY2009 to FY2013. In 9M-FY2014, this segment accounted for 18.6% of net revenues.Management attributes this to the additional capacity of steel pipe lines from the first quarter ofthis financial year. This may explain the lower portion of galvanized steel sheet in net revenuesin 9M-FY2014 since additional steel sheet production lines operated later in the year than thesteel pipe lines.

This product segment includes black steel pipe and galvanized steel pipe, which enjoys strongdemand and is a highly regarded product. From FY2009 to FY2013, sales volume of steel pipesachieved a remarkable CAGR of 50.7%. Despite the late entry into this competitive segment,the Group's steel pipe competes well with other well-known producers such as Hoa Phat and

Seah VN. Its market share grew rapidly throughout the year to capture 19.8% in 8M2014, upfrom 14.5% in 2013. This is a remarkable achievement considering that the steel pipe market isfragmented and the level of competition is much fiercer than the galvanized steel market.

Market share of steel pipe producers

14%

8% 10% 11%

5% g

,

Other companies iHoa Phat

i Viet Duci HSG

Market share of galvanized steel producers

2

1

%

,^

**

****

**

^

5~ B ~ I B ~ :2008 2009 2010 2011 2012 2013 8M2014

Source: VSA. Note: Excluding sales volume of Perstima Viet Nam as its products do not serve construction industry

Steel pipe (current designed capacity: 279,000 tons per year)

Other companies i

Nam Kim

Ton Phuong Nam

HSG

Sun Steel HSG market

share 48%

thousand

tons 1.600

1.400

1.200

1.000

800

600

400

200

0

42%

36%

30%

24%

18%

12%

6%

0%


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thousand tons 900

25%

Source: VSA

720

540

360

180

0

H SeAH VN HSG

market share

20%

15%

10%

5%

0%2009 2010 201

12012 2013 8M2014


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The Group will continue to focus on

core segment. Management expects

revenue from other products segment

to gradually decline in the future.

HSG's manufacturing process

Others products:Other products include plastic pipe and purlin which contribute around 8% of the revenue structurefrom FY2009 to FY2013. According to management, these products have lower margins then itscore products (galvanized steel and steel pipe), moreover, the Group has not expanded thecapacity of these production lines since FY2008. Following the strategy to prioritize manufacturingcore products which are more profitable, it is expected that the growth rate of revenue from theseproducts will gradually decline in the coming years.

CAPACITY EXPANSION TO DRIVE GROWTHHoa Sen Group's cold rolling line gets its main input materials of hot-rolled coil (HRC) from Asiancountries such as Japan, South Korea and Taiwan. HRC that goes through this line will in turn beused for cold rolled coil (CRC).

CRC is the input material for galvanizing lines to produce steel sheets, or it could go through anannealing furnace and slitting line and transfer to steel pipe line to produce steel pipe products.

HSG products meet international quality standards of the United States, Australia, and Japan. Inaddition, HSG is the first company in Vietnam to adopt NOF technology to produce galvanized

steel sheets, which can create durable products with exceptional quality at a low cost.

Main production line No. of lines Designed capacity Hoa Sen Group (in Binh Duong) tons/year Galvanizing line 1 1 50,000 Color coating line 2 90,000 Hoa Sen Phu My Steel Sheet Plant-Phase 1 (in Ba Ria - Vung Tau) Pickling line 1 700,000 Cold rolling line 2 400,000 Hot galvanizing line 1 450,000 Galvanizing line 1 100,000 Color coating line 1 180,000

Annealing furnace 2 142,000 Acid recycling line 1 5,000l/hr Hoa Sen Phu My Steel Sheet Plant-Phase 2 (in Ba Ria - Vung Tau) Galvanizing line 1 120,000 Hot galvanizing line 1 400,000 Color coating line 1 1 50,000 Cold rolling line 2 400,000 Hoa Sen Steel Sheet One Member LLC (in Binh Duong)

Pickling line 1 250,000 Cold rolling line 1 180,000

Annealing furnace 1 42,000 Hoa Sen Building Materials One Mem ber LLC (Ba Ria Vung Tau) Steel pipe line 10 101,000 Steel pipe line 3 41,000 uPVC pipe line 12 30,000 Branch of HS Building Materials One Member LLC (Binh Duong) Steel pipe line a 66,000 Branch of HS Building Materials One Member LLC (Hai Duong) Steel pipe line a 71,000 Total Color coating line 980,000 Galvanizing line 370,000 Hot galvanizing line 850,000 Color coating line 420,000 Steel pipe line 279,000

Main production lines

Source: HSG


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Completion of Phase 2 of Hoa Sen

Phu My Steel Sheet plant enables the

Groups to source its own CRC

materials.

The Group's CRC production line is

the second largest in Vietnam. The

Group can set competitive price

thanks to economies of scale.

The Group has two production plants; one in Binh Duong and one in Ba Ria - Vung Tau. The plantin Binh Duong has operated since 2004, with galvanized capacity of 150,000 tons per year; andcolor coating capacity of 90,000 tons per year.

The large scale production plant in Ba Ria - Vung Tau was constructed in 2010 under the name ofHoa Sen Phu My Steel Sheet Plant. The plant has a total investment of VND3,071 billion, with atotal area of 16.7 ha, including 87,542 sqm for its workshop and 690 sqm for its office, an 110KVtransformer station and water recycling system.

Phase 1 of the Hoa Sen Phu My Steel Sheet Plant includes the following production lines: coldrolling lines of 400,000 tons per year; hot galvanized line of 450,000 tons per year; galvanizedlines of 220,000 tons per year; and color coating line of 180,000 tons per year.

After the completion of Phase 1 in 2011, the total capacity of galvanized steel products reached820,000 tons/year. However, its cold rolling lines only had combined capacity of 580,000tons/year.

In 2013, the Groups started the construction of phase 2 with a total investment of VND1,344

billion, which is financed by long-term debt and retained earnings. The project was completed in August 2014. By then, HSG's production capacity had increased significantly as cold rollingcapacity reached 980,000 tons/year; galvanized capacity reached 1,220,000 tons/year; colorcoating capacity reached 420,000 tons/year. The Group's vertical investment to integrate the valuechain has essentially been completed.

It's worth noting that Phase 2 of the project will enable HSG to source 100% of its CRC needs,therefore, it will only need to import HRC. Being able to fully self-supply CRC is a major advantagewhen compared to its peers, who still depend on imports of CRC. The import tax rate of CRC is7%, while that of HRC is 0% (according to CEPT commitments - Common Effective PreferentialTariff). In addition, with designed capacity of 980,000 tons/year, HSG's cold rolling lines will be thesecond largest after Posco (1.2 million tons/year) and about five times the capacity of Nam KimGroup (200,000 tons/year) and Dai Thien Loc (200,000 tons/year).

When the new cold rolling lines are put into operation in FY2014, it will take some time for thetesting period before the production lines can reach their fully designed capacity. If we assume that

the utilization rate of the cold rolling lines is 75% in FY2015, then the amount of import duty thatthe Group can save from being able to self-produce CRC is: 980,000 (designed capacity) * 75% *USD655 (CRC price) * 7% (import tariffs) = USD33.7 million. This allows the Group to set morecompetitive prices both thanks to economies of scale and preferential tax rates.

According to its development strategy with a vision to FY2018, when its sale volumes reached onemillion tons, the Group expects to implement a hot-rolled strip mill project to further integrate itsvalue chain. However, after discussions with management, we learned that the Group chose not toimplement the project due to the substantial investment capital requirements. Meanwhile, theGroup could still buy raw materials from its traditional channels at good prices. In addition, whenthe Formosa Ha Tinh project goes into operation in late 2015, the demand for imports of rawmaterials will be significantly reduced as this project can provide the domestic market with about3.3 million tons of hot-rolled steel, providing the Group with another source of raw materials.


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Export is good sales channel in times of

slowdown in domestic consumption. The

main drawback is anti-dumping lawsuit in

export markets.

SALES GROWTH TO BE FURTHER DRIVEN BY EXPORTS

Galvanized steel production technology is not overly complex, the main factors that differentiatea product of a company are the input costs such as labor and electricity in which HSG has acompetitive edge on the export markets as it benefits significantly from low labor costs.

HSG has built a strong reputation in the export markets as the last two years have witnessedsignificant increases in both export volume and value. From FY2009 to FY2013, the export revenues and export volume grew at CAGR of 161% and 158%, respectively.The proportion of export revenue as a percentage of total revenue increased from 3.4% inFY2009 to 41.1% in 9M-FY2014.

The Group is seeking to diversify its export markets to reduce reliance on some markets. HSGexports most of its products to ASEAN countries to serve the construction industry. The Groupexpects to reap benefits from the lowering of intraregional tariffs through the Common EffectivePreferential Tariff (CEPT) Scheme for Asean Free Trade Area. However, it is difficult to quantify

these benefits as HSG's products will be up against its counterparts from other Asean countries. Moreover, ASEANcountries could still initiate anti-dumping investigations should a large quantity of products with cheap prices flood intotheir country.

HSG also plans to boost more exports to major markets in other regions such as the U.S., Australia and Europe. These markets are highly demanding in terms of product quality,moreover, high transportation costs and prolonged transit time are also challenging factors thatthe Group needs to take into account when choosing to export to these markets.

Maintaining high sales volume is the Group's priority and boosting exports will be the maingrowth driver to keep sales volumes going. Exports yield lower profit margins due to hightransport costs, however, help HSG to maintain their high sales volume during the off-seasonconstruction period, particularly the first quarter (Lunar New Year) and third quarter (rainyseason). In addition, the Group will gain revenue in foreign currency, which helps reduce itsexposure to exchange rate risks.

Domestic and export volumes Export revenues (USDmn)

=6= --- 1 - - --------1 -- ---- --- 1 - --- - ---- 1 -- 1 --- --- 1 - 1 --- ----1 0 1 --------------- 1 --------------1 ------------- 1 ------------- 1------------- 1 -------------FY2009 FY2010 FY2011 FY2012 FY2013 9M -FY14 FY2009 FY2010 FY2011 FY2012 FY2013 9M-FY14Source: Annual reports Source: Annual reports


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Total production costs by factors (FY2013)

HSG can compete directly with big companies in the region as its products are internationally certified and pricecompetitive. Further, Vietnam's geographic location in the region can help the Group ship large orders quickly to other

ASEAN countries.

However, The Group may face two major challenges:

Fluctuations in exchange rate.The Group needs to heavily borrow in USD to import raw material, thus any unfavorable movements in VND/USDexchange rate will have a major impact on the Group's bottom line.

However, the Group will also benefit from this currency depreciation as it receives export revenues in dollars.

The Group's USD-denominated loan accounts for 70 - 80% of total outstanding loans and the interest rate differentialsbetween the USD and VND loans are about 4% -6% per year. Therefore, even if the VND depreciates, the Group'sinterest expense is still lower compared to borrowing entirely in VND.

Trade disputes in the export market.Trade dispute is a concern for steel companies exporting to ASEAN countries. Many steel associations in other countries,such as Thailand and Malaysia, filed letters of complaint regarding the mounting steel imports from Vietnam. Althoughthese filings only convey concerns regarding possible damage to their domestic steel industries, it does reflect the highlevel of protection of their steel industries.

As Vietnam's steel products are offered at attractive prices, they have certain competitive advantages in the exportmarket, which means that a large quantity of products with cheap prices flooding into the country could spark anti-dumping investigations.

FINANCIAL PERFORMANCE

COST ANALYSIS

SG&A and financial expenses (% net revenues) Others 3,4% Outsourcing

Depreciation 8.7% 1,8%

Humanresources

3,4% 3,0%

'4,3%'

-3,5%- _2,3%_

2,6% 4,1% "3,0%_

1,8% 4,2% _2,1%_ ,2%-

TO _3,0%_ ~7%

,4%^^H3,5%^^a3,4%

Source: Annual report, VPBS analysis

16%

14%

12%

10%

8%

6%

4%

2%

0%

FY2009 FY2010 FY2011 FY2012 FY2013


Administrative expense/Revenues

Selling expense/Revenues FX loss/Revenues

Interest expense/Revenues


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The Group's cost structure is relatively stable over the years, in which, the cost of raw materials(mainly HRC) has accounted for over 80% of total production costs, so fluctuations in the HRCprice have a major impact on the Group's profitability.

Declines in net FX loss and interest expenseFinancial expenses mainly consist of interest expense and foreign exchange losses. The Groupexperienced a surge in interest expense in FY2010 as interest rates started trending up afterthe interest rate subsidy program ended in 2009. In addition, in 2010, the State Bank of Vietnamdevalued the exchange rate USD/VND three times. The Group has to heavily borrow foreigncurrency to import raw material, HSG has to shoulder the additional costs arising from therevaluation of its loans. From FY2012, net FX loss experienced major declines as revenuegained from export helped the Group partly offset FX loss, moreover, interest expense alsodeclined thanks to the interest rate cuts.

Higher SG&A expenses than industry averages As the Group has its own retail network and an increasing number of employees, its selling and

administrative expenses of total revenue stay fairly high above the average of the steel industry.The Group's SG&A accounted for 6-7% of net revenue from FY2009 to FY2013, which washigher than industry average of 3-5% of net revenue. S,G&A expenses are expected to remainhigh as the Group expands its retail network, which is costly to operate as the Group has toshoulder the additional staff cost, outsourcing services cost. In addition, the Group sponsors formany television programs and charitable activities as part of the marketing effort to consolidateits brand within the industry, which also push up its SG&A expenses.

GROWTH

Steady growth of revenues but unsteady net profitsFrom FY2009 to FY2013, net revenues exhibited remarkable growth at CAGR of 42.8%, whilesales volume during this period achieved CAGR of 39.7%, indicating that growth in revenueswas mainly driven by growth of sales volume. However, operating profits grew at slower ratewith a CAGR of 26.2% during the same period as the Group faced certain difficulties regarding

cost management.FY2011 net profit declined by 25.3% y-o-y due to soaring raw material cost and exchange ratelosses. In addition, the rising interest rates environment and a distressed stock market made itimpossible for the bond issuance of VND500 billion, which forced the Group to resort toborrowing loans and further pushed up interest expense.

In 9M-FY2014, the Group recorded net revenues of VND10,966 billion, up 28.1% y-o-y, fulfilling78.3% of the management's target. The first nine months saw the sharp increase of cost ofgoods sold and selling expenses. Consequently, net profits reached VND281.5 billion, downsharply 47.7% y-o-y and fulfilling 46.9% of the target.


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14.000

12.000

10.000

8.000

6.000

4.000

2.0

O FY2OO9 FY2O1O FY2O11 FY2O12 FY2O13 9M-FY14


Net profits (VNDbn) Net revenues (VNDbn)

Current assets will account for greater portion in the asset structure

From FY2009 to FY2013, equity grew at a CAGR of 23.9% with primary contribution fromretained earnings. Total assets grew at a CAGR of 30.8%. In FY2012, current assets dropped15% y-o-y as the Group proactively reduced inventory to pay off short-term loans.

In the assets structure, current assets accounts for a stable proportion of 50% of total assets.However, in FY2013, current assets accounted for 59% due to 96% y-o-y increase in inventory,which must be maintained at high level in order to meet the demand of the domestic and exportmarket.

In the past few years, the Group's most prominent investment was the Hoa Sen Phu My project.Phase I of the project was completed in 2011 and Phase 2 was completed in 2014. The Groupstated that its vertical investment process (which focuses on completing the value chain ofproduction) will essentially be completed by the end of2014. Going forward, the Group will focus on the expansion of its retail network, and possibleconstruction of its production plant abroad.

From FY2015, we expect the proportion of long-term assets in the asset structure to decline

after the completion of phase 2, while the proportion of short-term assets will increase due tothe increase of inventory and accounts receivable to accommodate the expansion of itsdomestic and export market.

Shareholders' equity Total assets

I I I I II FY2009 FY2010 FY2011 FY2012 FY2013 9M-FY14 Source:

7OO

6OO I

5OO

4O

O

3O

O

2O

O

I 1OO

O

FY2OO9 FY2O1O FY2O11 FY2O12 FY2O13 9M-FY14



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Annual report, VPBS analysis


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Cash conversion cycle of HSG

24

0

19

0

14

0 90

40

-10

-60

Payable days outstanding Inventorydays outstanding Receivables days

outstanding Cash conversion cycle

FY2009 FY2010 FY2011 FY2012 FY2013


FY2011 FY2012 FY2013

1 I HPG POM NKG VGS DTL TLH | HSGj

EFFICIENCY AND PROFITABILITY

Flexible structure of USD/VND denominated loans to optimize borrowing demand

The Group uses significant short-term debts to finance its working capital while keeping cashbalances at minimum. However, the Group has a certain advantage over its peer by maximizingthe use of debts with lower borrowing costs.

In the short-term debts structure, USD denominated loans accounted for 80.6% of totaloutstanding loans by the end of FY2013. Management will actively adjust the portion of USDand VND denominated loans to take advantage of favorable interest rates. As stated in theFY2013 annual report, interest rates for short-term interest rates of USD loans fluctuatebetween 3% and 6% while that of VND loans are between 9% and 11%. The Group heavilyborrows USD loans to purchase raw materials and utilize exports revenues to pay off debts.

To better assess management efficiency in using short-term assets and liabilities to generatecash, we use the cash conversion cycle (CCC) to reflect management policies related to

accounts payables, account receivables and inventory.

Cash conversion cycle of steel companies

Source: Annualreport, VPBS

analysis

The Groupoffers a 15-20day credit

policy for its customers and major partners, the receivablesdays outstanding staying relatively stable over the years

reasonably reflects this policy.

CCC surged to 117 days in FY2010 as inventory days outstanding peaked at 133 days, whichwas due to the mounting of raw material inventories caused by the rotational power cut from 6to 8 days in three consecutive months amidst construction season. CCC was shortenedsignificantly in FY2012 as the Group started to boost export activities, thereby rapidly reducinginventories. The Group can also utilize its good relationship management with supplier toextend payable days to accommodate sufficient working capital.

In FY2013, CCC of listed steel companies in Vietnam averaged around 98 days, which washigher than that of 79 days of the Group. We believe this is a direct result of sustainable andhigh sales volume, providing a stable source of revenue, therefore, the liquidity risk of the Groupis still manageable.

200

150

79 K*

100

50 0


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8%


ROE and ROA experienced steep declines from FY2009 to FY2011 as equity and asset

increased significantly following the implementation of the Hoa Sen Phu My project (Phase 1)while net profits did not keep up with the same growth. ROE and ROA hit the lowest in FY2011due to deteriorating net margin in the context of the economic downturn. However, such profitmargin was still higher than the average of the steel industry in such a difficult year as inFY2011.

Higher gross profit margins than other galvanized steel producers; gross marginworsened in 9M-FY2014

The Group's gross margin dropped to its lowest in FY2011, reflecting the challenging macroenvironment in which it operated, and recovered steadily through FY2013, by which time grossmargin improved to 14.5%.

Moreover, we saw that gross margin of HSG was higher than other galvanized steel and steelpipe producers like NKG and VGS. The past two years saw the industry landscape becomeincreasingly competitive, most steel companies' gross margin declined as they had to lowerselling prices to maintain market share.

HSG follows the "just in time" inventory management technique closely, meaning that it onlybuys just enough raw material inventory for their production plan. However, it still monitorsclosely the movement of HRC prices and will actively speculate on raw material if the pricemovement is favorable. The Group imported substantial amount of HRC in the last few monthsof 2013 in anticipation of bounce back in HRC price once global economy outlook improves.However, HRC price still proceeded on a downtrend, consequently, the use of high cost rawmaterial inventories coupled with lower selling prices depressed gross margins in 9M-FY2014 to11.4% from 15.9% in 9M-FY2013.

ROE and ROA Dupont analysis

\ 4,94%>440%

-^ST ------------------------------ 3,3 -------- 3,65%X^,2

2,6 2,7 x >2,6-------

--------------- --- ------------- --- 1 1,91,2 1 ,4 1 ,6

FY2009 FY2010 FY2011 FY2012 FY2013


Net profit margin

> Asset turnover

Asset/Equity ROE ROA

25%

20%

15%

10%

5%

0% FY2009 FY2010 FY2011 FY2012 FY2013


8x 30% 6,69%

6% 6x

4x 4%

2%

0%


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Gross margin of galvanized steel & steel pipe producers HSG's profit margins

LIQUIDITY AND SOLVENCY

Despite its strong growth in revenues, the Group keeps its cash at minimum to accommodateon-going business operations, therefore, the cash ratio stays low from 0.2x to 0.4x. Current ratioand quick ratio worsened slightly as a result of increasing short-term borrowing to finance itsworking capital, mainly inventories.

Total debt to equity and other solvency ratios deteriorated especially in FY2011 due tosubstantial borrowing that was used to finance its Hoa Sen Phu My Steel Sheet Plant projectamidst rapidly rising interest rates. These ratios improved in FY2012 as the Group increased itsexport revenues to partially finance for its operations. From FY2013, the Group implementedPhase 2 of Hoa Sen Phu My Steel Sheet project, as the project was mostly financed with long-term borrowings, we expect the Group's interest expenses to surge in the next two years.

Liquidity ratios

Cash ratio O.O4x O.O2x O.O4x O.O3x O.O4x urrent rat o . x . x . x . x . x

Quick ratio O.4Ox O.36x O.3Ox O.4Ox O.28x Total debt/Equity 1.17x 1.29x 1.63x 1.31x 1.54x Total debt/Total assets O.45x O.49x O.49x O.5Ox O.48x Debt/EBITDA 2.42x 3.O5x 3.78x 2.57x 2.94x Debt/EBIT 3.21x 3.87x 5.19x 3.49x 3.93x EBITDA/Int. Exp. 5.63x 4.36x 2.66x 3.O3x 6.89x EBIT/Int. Exp. 4.24x 3.45x 1.94x 2.23x 5.16x


Gross margin -Operating margin

EBITDA margin PBT margin

FY2009 FY2010 FY2011 FY2012 FY2013 9M-FY14


HSG NKG VGS


25%

20%

15%

10%

5%

0%


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FORECAST ASSUMPTIONSSelling volumes

Galvanized steel sheet:

For FY2014, we project the y-o-y growth rate of galvanized and color coated steel sheet of HSGat 1% to reach 608 thousand tons. In FY2015, higher volume growth could be achieved intandem with demand recovery. Possible concerns regarding growth rate include new entrancesor capacity expansion of HSG's competitors and anti-dumping lawsuits in HSG's exportmarkets. To reflect the impacts of these factors, we assume that the growth rate of salesvolume will slow down to reach 18% in FY2018.

Steel pipes:

For FY2014, we project the y-o-y growth rate of steel pipe at 88% to reach 186 thousand tons. Itwill be difficult for HSG to maintain this high volume growth rate in FY2015 unless it has plans toexpand its production capacity. By FY2018, we expect its steel pipe lines to work at nearly fulldesigned capacity and it is able to sell all of its outputs.

Average selling price (ASP)Selling price depends on supply and demand in the market and raw material prices (mainly hotrolled coil). Raw material prices are sensitive to changes in global and domestic demand, whichare affected by economic conditions. Despite significant fluctuations in the short term, steelprices tend to rise over the long term to reflect the prospects of the global economy andstronger demand.

In 9M-FY2014, ASP of steel sheet segment reached VND18.4 million/ton, and that of the steelpipe segment was VND15.2 million/ton. From FY2015, we assume that ASP will recover by 1%-2% each year as commodity prices including hot-rolled and cold- rolled steel are expected torecover gradually due to better global economic outlook after three years of downturn.

Projected sales volume ousan tons

Ga vanize stee s eet 529 608 729 875 1,050 1,239 Growth (% y-o-y) 15% 20% 20% 20% 18% Stee pipe 99 186 205 225 248 273 Growth (% y-o-y) 88% 10% 10% 10% 10%

Source: VSA, VPBS's projection


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Gross profit margin

USD/ton HRC price Gross margin Gross margin (exc. Depreciation)

1.000 40%

10%

30%

20%

800

400

t

HSG's gross margin was significantly influenced by major movements in HRC price since it isfully dependent on imports of this product. Should the price movement become favorable, theGroup will see major improvements in its gross margin.

The Group publicly disclosed that it imported large amounts of HRC in April 2009 when HRCprice reached an all-time low, which should be able to satisfy nearly two quarters of production.The cheap source of raw material boosted gross margin as high as 35% in 4Q-FY2009.

From FY2010 to FY2012, we believe the Group remained cautious and followed closely the"just in time" model or had minor speculative activities as this period saw wild fluctuations inHRC prices. Gross margins plummeted to stay around 10-14%. In general, it was difficult formost steel producers to achieve gross margins as high as the period before 2009. This isattributable to the fact that the operating environment of the steel industry took a worse turn:high-cost raw materials coupled with significant lower selling prices to stay competitive in thecontext of plummeting domestic demand and mounting inventories. This has become a long-standing issue of the industry.

In the Annual General Meeting held in January 2014, the Group stated that it importedsubstantial amount of HRC to satisfy two quarters of production, however, wrong timing ofspeculation depressed the Group's gross margin in 9M-FY2014 from 15.9% to 11.4% in 9M-FY2013. The Group actively pushed sales through its retail channel to provide a way out for thishigh cost inventory. For the final quarter of FY2014, to be on the conservative side, weanticipate gross margin to stay unchanged at 11.4% as average selling prices are expected tostay unchanged or may decrease in order to stimulate sales of substantial finished inventory.Steelfirst, a leading metal industry trade publication, expects the major HRC price trend in theremaining quarter of 2014 to stay flat or even decline slightly amid concerns that Chinese steelproducers are ramping up production in spite of sluggish demand due to the Government'stightening measures.

0%

0

l- -

t - r

- -l

-t

- r - -

l -t

- r - l

- -t

- r - l

- -t

- r - l

- t- - r

-

Source: Quarterly reports, Bloomberg, Note: arrows indicate the timing of speculation

200


27/37


We recognize the difficulty in forecasting the Group's gross margin for FY2015 onwards as thisis highly dependent on the movement of HRC price and most importantly the Group's decisionon whether or not to speculate and the timing of the speculation. For the forecast period, weexpect the Group's gross margin to recover and increase by 1% per year in FY2015 andFY2016, due to: (1) the Group is capable of fully self-supplying its own source of CRC; (2) exitsof incompetent galvanized steel producers, who are still dependent on imports of CRC; (3)improvements in domestic steel demand, which should tip the favor in the supply side and leadto favorable movements of steel prices.

Selling, general and administrative expenses (SG&A expenses)

SG&A expenses primarily include staff costs, office supplies and outsourcing services, amongothers. In the forecast period, we expect that SG&A expenses will remain stable at 7% ofrevenue as the Group pursues an aggressive expansion strategy in both domestic andinternational markets.

Financial income and expenseFinancial income consists of interest income and foreign exchange gains arising from cash andaccounts receivable in foreign currencies that HSG gains through export activities.

Financial expenses mainly consist of interest expense and foreign exchange losses.

Interest expenses are calculated based on the short-term and long-term outstanding loans.Exchange rate loss arises from the revaluation of USD-denominated loans by the end of theyear. The Group has a substantial amount of USD-denominated shortterm loans. To reduce theexchange rate risk, HSG increased export activities to partially generate sources of foreigncurrency. However, export revenues only accounted for 45% of net revenue, therefore, theGroup is still exposed to substantial exchange rate risk. For the forecast period, we evaluate theexchange rate loss arising from the revaluation of foreign currency loans by assuming that VNDdepreciates by 2% each year due to incentives of the government to stimulate exports.

Tax ratesThe Group has an obligation to pay income tax at the rate of 25% on taxable profit. Theprovisions of the Investment Incentive Certificate allow HSG to be exempt from businessincome tax for three years starting from the first year it generates a taxable profit (2004), andthey are entitled to a 50% reduction in business income tax for seven years thereafter. Thismeans that the Group was subject to a tax rate of 25% in 1Q-FY2014, and 22% from 2Q-FY2014. The corporate tax rate is set to be lowered further to 20% from FY2016.We make the following key assumptions with regard to HSG's consolidated balance sheets:

Days sales outstanding: remaining stable at 20 over the forecast period. Days inventory outstanding: remaining stable at 93 over the forecast period. Days payable outstanding: remaining stable at 42 days over the forecast period. Current assets and current liabilities: remaining stables as percentages of related

consolidated revenues and expenses over the forecast period. Capex. After the completion of Phase 2 of Hoa Sen Phu My Steel Sheet plant in

FY2014, the Group will have essentially finished its vertical investment process. Weassume that the Group will build 15 retail branches each year from FY2015 with capexfor each branch of about VND4 billion. In addition, HSG will spend around VND30


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billion for the ongoing maintenance of its machinery equipment. Borrowings: short-term borrowings remain over 20% of revenues in FY2014, and will

gradually decline from FY2015 as the Group's liquidity position improves while long-term borrowings will be gradually paid off from 2014. We expect HSG to utilize itsretained earnings to finance minor capital expenditures in the future.

VALUATIONBased on the discounted cash flow (DCF) and multiples approaches, we derived a fair value ofHSG at VND46,500 per share.

DISCOUNTED CASH FLOWOur DCF model suggests a target price of VND40,300 per share Our inputs for the DCF model

are as follows:

The risk-free rate is taken from the yield of five-year local currency Government bondyields, which is equivalent to 5.7%.

The expected market return is expected to be 15.0%. Beta is estimated to be 1.2. Cost of equity is estimated to be 16.7% by using the capital asset pricing

model (CAPM). Weighted average cost of capital (WACC) is calculated to be 11.3%. Terminal growth rate is accessed to be 3%.

COMPARABLE MULTIPLESCompared to its regional peers, we noted that HSG delivered superior 2013 ROE and ROAand gross profit margin. Accordingly, we derived HSG's targeted P/E at 15.5x and EV/EBITDAat 8.0x based on its regional peers.

Selected regional peer

Valuation method Fair price Weight (VND/share) DCF 40,300 40% 16,120

P/E at 15.5x 61,449 30% 18,435

TEV/EBIDTA at 8.0x 39,833 30% 11,950

Target price 46,500

VN-INDEX2014E

HSG's fair value(VND/share)

Valuation multiples Relative Target

P/E 1.06 14.6x 15.5x 61,449EV/EBITDA 0.77 10.3x 8.0x 39,833


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Data as of 9/19/2014. Source: Bloomberg, VPBS

Vietnam's listed steel companies

Data as of 9/19/2014. Source: Bloomberg, VPBS

Company Country Market cap

(USDmn)

Gross marflin

Net margin ROA ROE P/E P/B EV/EBITDA Relative P/E

Relative P/B Relative

EV/ EBITDA 2012

2013

2012

2013

2012 2013 201

2

2013

LTM 2014E LTM 2014E LTM 2014E

Maharashtra Seamless Ltd India 389 NA NA 13% 9% NA 5% NA 5% 24.2 28.0 0.9 0.9 19.8 19.3 1.3 0.3 1.7 Welspun Corp Ltd India 358 NA NA 3% NM 2% NM 6% NM 29.7 16.9 0.7 0.5 4.7 6.3 1.6 0.2 0.4 Ratnamani Metals & Tubes Ltd India 372 NA NA 9% 11% 11% 13% 23% 23% 15.8 NA 3.0 NA 8.4 NA 0.8 1.0 0.7 Jai Corp Ltd India 291 NA NA 20% 15% 5% 4% 5% 5% 17.8 NA 0.8 NA 14.3 NA 0.9 0.3 1.2 Uttam Galva Steels Ltd India 189 NA NA 1% 1% 1% 1% 7% 5% 38.6 NA 0.9 NA 8.5 NA NA 0.3 0.7 Thai-German Products Pub Co Thailand 140 15

% 16% 9% 5% 9% 3% 22% 6% NA NA 3.9 NA NA NA NA 1.7 NA International Steels Ltd Pakistan 113 9% 9% NM 2% NM 2% NM 8% 17.0 13.4 2.0 NA 8.7 NA 1.5 1.0 1.3 Tong Herr Resources Berhad Malaysia 86 9% 12% 3% 3% 3% 3% 5% 5% 11.8 9.6 0.9 NA 6.5 5.8 0.7 0.4 0.6 Gandhi Special Tubes Ltd India 43 NA NA 29% 23% 21% 14% 23% 15% 15.2 NA 1.7 NA 9.1 NA 0.8 0.6 0.8 2S Metal Pcl Thailand 47 5% 6% 1% 2% 5% 5% 9% 10% 22.0 NA 1.8 NA 16.1 NA 1.2 0.8 1.3

Average 9% 11% 10% 8% 7% 6% 13% 9% 21.3 17.0 1.6 0.7 10.7 10.5 1.1 0.7 1.0 Median 9% 10% 9% 5% 5% 4% 8% 6% 17.8 15.2 1.3 0.7 8.7 6.3 1.1 0.5 0.8 Hoa Sen Group Vietnam 194 14% 15% 3.6% 4.9% 6.6% 9.3% 19% 27% 12.7 10.8 1.8 1.8 8.5 8.2 0.8 0.9 0.8

Company name Market Capital

FY2013 6M FY2014 Trailing P/E

Trailing P/B ROA ROE Net sales Gross profits Net income Debt to

Equity VNDbn VNDbn % y-o-

y VNDbn % y-o-y %margin VNDbn % y-o-y %margin x HPG Hoa Phat Group 26,987 9.6% 22.2% 13,197 59% 2,822 85% 21.4% 1,814 87% 13.7% 0.6 9.6 2.5 POM Pomina Steel Corp 1,863 NM NM 5,416 5% 232.8 72% 4.3% -9.1 NM NM 2.3 NA 0.8 TLH Tien Len Steel Corp 710 6.3% 13.2% 1,651 13% 110.7 219% 6.7% 47.6 -65% 2.9% 0.8 28.2 0.7 DTL Dai Thien Loc Corp 541 0.9% 2.6% 950 -2% 81.8 16% 8.6% 11.2 41% 1.2% 1.2 24.6 0.7 VIS Vietnam - Italy Steel 448 NM NM 1,787 2% 118.5 -22% 6.6% 11.9 -54% 0.7% 2.0 NA 0.7 NKG Nam Kim Steel JSC 411 2.3% 17.1% 2,997 47% 160.5 -5% 5.4% 34.5 -14% 1.2% 2.9 8.9 1.1 SMC SMC Investment Trading 301 1.0% 4.5% 5,360 8% 145.0 11% 2.7% 9.4 -50% 0.2% 3.1 18.1 0.5 VGS Vietnam Germany Steel Pipe 277 1.1% 2.6% 1,154 -10% 53.9 5% 4.7% 14.5 245% 1.3% 0.8 12.1 0.6 TNA Thien Nam Trading 224 5.2% 13.7% 715 0% 60.5 2% 8.5% 17.5 -9% 2.5% 1.8 6.8 0.8 HMC Hochiminh City Metal Corp 197 2.0% 6.1% 1,114 -35% 48.2 -25% 4.3% 10.1 -2% 0.9% 1.7 9.6 0.6 DNY DANA-Y Steel 159 0.8% 4.0% 1,061 13% 52.9 -11% 5.0% 4.1 -61% 0.4% 2.8 19.7 0.4 HLA Huu Lien Asia Corp 93 NM NM 1,202 -43% -194.9 NM NM -277.8 NM NM 32.7 NA 3.6 KKC Produce & Trading Metal 93 6.7% 17.5% 278 92% 25.8 99% 9.3% 12.5 137% 4.5% 1.5 4.4 1.1 SSM Steel Structure Manufacture 62 6.7% 13.0% 86 17% 11.5 50% 13.4% 4.0 62% 4.6% 0.9 5.2 0.8 BVG Bacviet Steel 27 NM NM 69 -24% 13.3 -21% 19.2% -12.5 NM NM 4.2 NA 0.4 Average 3.9% 10.6% 10% 34% 8.6% 26% 2.8% 4.0 13.4 1.0 Median 2.3% 13.0% 5% 8% 6.7% -5% 1.2% 1.8 9.6 0.7

HSG Hoa Sen Group 4,113 9.3% 27.5% 6,641 25% 792.7 -8% 12% 170.6 -52% 2.6% 2.3 12.7 1.8


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o _ +J ^ (U c-


31/37


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CONCLUSIONWe believe the current restructuring of the steel industry to weed out incompetent producers provides a good opportunity forcompanies with competitive advantages like HSG to move forward and seize additional market share. Moreover, Vietnam isin the process of industrialization and urbanization, which should boost the demand for HSG's products.

The Group's key advantage is its ability to internally source its CRC needs. FY2014 marks a new milestone for the Group asit will be able to source 100% of its CRC requirements thanks to the completion of Phase 2 of Hoa Sen-Phu My Steel Sheetplant. The extensive retail network is another core competitive advantage, which allows it to deliver its product to end-usersand adopt a flexible sales program in response to changing market conditions.

We duly note that HSG still needs to import 100% of its HRC requirements, therefore, it is still exposed to the risk of HRCprice fluctuations as well as exchange rate risks. To counter these adverse effects, the Group has boosted export activities togain more foreign currency sources. Exports provide potential sales channels in times of slowdown in demand during the off-peak construction season. Our major concern is directed towards possible trade disputes with the Group's major exportmarkets.

We acknowledge the Group's leading position in the industry and its competitive advantage, however, the Group posteddisappointing 9M-FY2014 earnings results due to wrong timing of raw material speculation. All factors considered, werecommend investors to HOLDthe stock with our target price derived at VND46,500 per share.


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1 INCOME STATEMENT (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F Revenues 8,166 10,088 11,760 15,030 17,951 21,470 25,513 29,955 % y-o-y 66.7% 23.5% 16.6% 27.8% 19.4% 19.6% 18.8% 17.4%

Cost of goods sold 7,110 8,683 10,052 13,317 15,725 18,593 22,094 25,941

Gross pro its 1,056 1,405 1,708 1,713 2,226 2,877 3,419 4,014 % y-o-y 13.4% 33.1% 21.5% 0.3% 29.9% 29.2% 18.8% 17.4%

SG&A expenses 498 648 842 1,067 1,275 1,524 1,811 2,127

EBIT 558 758 866 646 951 1,353 1,607 1,887 % y-o-y -2.6% 35.8% 14.3% -25.3% 47.2% 42.2% 18.8% 17.4%

eprecat on amortzat on

EBITDA 766 1,031 1,156 997 1,308 1,715 1,975 2,261

Financial income 49 49 40 48 55 65 92 125

Financial expenses 458 409 247 247 260 295 331 389

Net other incomes / (expenses) 19 15 20 45 - - - - Income from associates 0 0 0 0 0 0 0 0 Pretax pro its 168 412 679 493 746 1,123 1,368 1,624 % y-o-y -33.1% 144.3% 65.0% -27.4% 51.3% 50.6% 21.8% 18.7%

Tax expense 8 43 98 112 164 225 274 325

ect ve tax rate . 1 . 1 . . . . . . Pro its a ter tax 160 368 581 381 582 898 1,094 1,299 % y-o-y -25.6% 129.8% 57.8% -34.5% 52.8% 54.4% 21.8% 18.7%

Minority interest - - - - - - - -

Net income _ 160 368 581 381 582 898 1,094 1,299 % y-o-y -25.6% 129.8% 57.8% -34.5% 52.8% 54.4% 21.8% 18.7%

marg n . . . . . . . .

Average number of shares (mn) 99 97 96 96 96 96 96 96

EPS (VND) 1,622 3,761 5,941 3,952 6,039 9,325 11,361 13,488 Cash dividend (VND/share) 500 1,000 3,000 2,500 2,000 2,000 2,000 2,000


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I BALANCE SHEET (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F

as near cas tems , , ort term nvestments - - -

Accounts receivables 464 607 548 820 979 1,171 1,392 1,634 Inventories 2,016 1,540 3,020 3,379 3,990 4,718 5,606 6,582 Other current assets 462 392 470 501 589 726 963 1,127

urren asse s , , , , , , , ,

Net fixed assets 2,721 2,585 2,790 3,337 3,071 2,798 2,520 2,237

ong-term nvestments Goodwill - - - - - - - - Other long-term assets 66 72 78 69 81 75 69 62 Long-term assets 2,845 2,717 2,927 3,465 3,212 2,933 2,649 2,358

Tota assets 5,916 5,323 7,142 8,304 8,921 10,205 11,884 14,238 Accounts payable 1,098 484 1,318 1,515 1,789 2,115 2,514 2,951

Short-term borrowings 2,254 2,040 2,814 3,081 3,231 3,650 4,082 4,793 Other short-term liabilities 134 169 207 350 445 559 716 934 Current ia i ities 3,486 2,693 4,339 4,946 5,466 6,324 7,312 8,678

Long-term borrowings 645 606 588 1,002 711 431 221 102

Other long-term liabilities 2 5 5 5 5 5 5 5 Long-term ia i ities 647 611 593 1,007 716 436 226 107

o a a es , , , , , , , , Share capital 1,008 1,008 1,008 1,008 1,008 1,008 1,008 1,008

Capital surplus 452 452 452 452 452 452 452 452 Retained earnings 343 605 821 961 1,350 2,056 2,957 4,064 Others (20) (46) (71) (71) (71) (71) (71) (71)

qu y Minority interest

, , , , , , , ,

o a a es an e qu y , , , , , , , ,

CASH FLOW STATEMENT (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F Cash from operation activities 249 452 221 409 449 644 672 945 Cash from investing activities (775) (56) (479) (903) (103) (84) (83) (83) Cash from financing activities 606 (456) 373 440 (334) (55) 30 400

e c anges n cas ____________ , Beginning cash balance 50 128 67 177 124 137 642 1,261

Exchange rate fluctuation (2) (2) (5) - - - - -

En ing cas a ance 128 67 177 124 137 642 1,261 2,522 Free cash flow (529) 392 (264) (489) 359 554 582 855


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1 RATIO ANALYSIS 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F 1

Va uation ratios Price to earnings (P/E) 7.2x 10.8x 7.1x 4.6x 3.8x 3.2x Price / earnings to growth (PEG) 0.1x (0.3x) 0.1x 0.1x 0.2x 0.2x Current EV to EBIT 9.5x 12.7x 8.6x 6.1x 5.1x 4.4x Current EV to EBITDA 7.1x 8.2x 6.3x 4.8x 4.2x 3.6x Price to sales (P/S) 0.3x 0.3x 0.2x 0.2x 0.2x 0.1x Price to book (P/B) 1.9x 1.8x 1.6x 1.2x 1.0x 0.8x Dividend yield 1.2% 2.3% 7.0% 5.4% 4.3% 4.3% 4.3% 4.3%

Pro ita i ity ratios

Gross margin 12.9% 13.9% 14.5% 11.4% 12.4% 13.4% 13.4% 13.4% EBITDA margin 9.4% 10.2% 9.8% 6.6% 7.3% 8.0% 7.7% 7.5% Operating margin 6.8% 7.5% 7.4% 4.3% 5.3% 6.3% 6.3% 6.3% Net profit margin 2.0% 3.6% 4.9% 2.5% 3.2% 4.2% 4.3% 4.3% Return on avg. assets 3.1% 6.6% 9.3% 4.9% 6.8% 9.4% 9.9% 9.9%

eturn on avg. equ ty . . . . . . . .

Leverage ratios

nterest coverage rato . x . x . x . x . x . x . x . x EBITDA / (I + capex) 0.7x 2.6x 1.8x 0.9x 4.9x 5.9x 6.3x 6.4x Total debt/capital 61.9% 56.7% 60.6% 63.5% 59.0% 54.2% 49.7% 47.3% Total debt/equity 162.6% 131.1% 153.9% 173.7% 143.9% 118.5% 99.0% 89.8%

Liqui ity ratios

Asset turnover 1.4x 1.9x 1.6x 1.8x 2.0x 2.1x 2.1x 2.1x ccounts rece va e turnover . x . x . x . x . x . x . x . x ccounts paya e turnover . x . x . x . x . x . x . x . x

nventory turnover . x . x . x . x . x . x . x . x Current ratio 0.9x 1.0x 1.0x 1.0x 1.0x 1.1x 1.3x 1.4x Quick ratio 0.3x 0.4x 0.3x 0.3x 0.3x 0.4x 0.5x 0.6x


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GUIDE TO RATINGS DEFINITIONVPBank Securities (VPBS) uses the following ratings system:Buy: Expected return, including dividends, over the next 12 months is greater than 15%. Hold:Expected return, including dividends, over the next 12 months is from -10% to +15%. Sell: Expectedreturn, including dividends, over the next 12 months is below -10%.

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